If third quarter results are any indication, mortgage lenders that have big servicing portfolios are in for some good times. Despite the rate volatility that saw 30-year mortgage rates climbing by more than 100 basis points between late June and early September, only to fall back below the 6% threshold by the end of the third quarter, servicers were able to reclaim some "impairment reserve" during the third quarter.
Enough to boost earnings-per-share by a dollar at Countrywide, for example. Enough to largely erase the problems associated with poor hedging of the mortgage pipeline at Washington Mutual, for example.
The neat thing about the third quarter is that, in no small part because of full loan production pipelines at the end of the second quarter, lenders got a rare combination of benefits. Loan production revenue remained strong. Mortgage servicing revenue increased as well. That's a stark contrast from the drag that mortgage servicing rights placed on stellar loan production numbers during most of the refinancing boom.
But like all good things, it can't last forever. We expect the fourth quarter of this year to be another banner one for the mortgage industry, with loan production levels falling from the peaks established earlier this year but remaining robust by historical standards. Mortgage servicing will probably look even better at the end of the fourth quarter than it does today. Companies like Wells Fargo, which had a weighted average note rate just below 6% at the end of the third quarter, will benefit from servicing portfolios with minimal runoff risk if rates edge upward between now and the end of the year, as many economists predict.
As for next year, we expect the mortgage servicing business to continue to shine. But that may not be enough to offset the sharp decline in loan production volume that is possible. Loan origination volume next year may come in at about half of this year's total - and that's assuming that rates only rise modestly. The big picture: most mortgage companies will have trouble matching the record profits that they've seen this year, even if lending volume does remain well above the $1 trillion level, as most housing economists predict. Yes, we're predicting that loan volume will fall dramatically. But then again, we made that prediction last year too.
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